I’ve been invited to attend a meeting of area executives to discuss corporate social responsibility in the San Diego (California) region. We will be discussing good things like how to increase volunteerism and sustainability among the large and small businesses fortunate enough to be located here. This is good stuff… but not great stuff.
For years I have been pointing out that in poll after poll consumers view the first corporate social responsibility of business to be the well-being of a company’s own employees. For instance, over the last 10 years Walmart has turned itself into quite a green company. They are world class at eliminating packaging waste and even reducing their carbon footprint. Of course they do this because it helps them save money. Nothing wrong with that but you have to wonder if it didn’t save money would they care about any of these things? Meanwhile how do you think they’re doing with their higher corporate responsibility of treating their employees with respect? If you think not good, you’d be right. Their reputation for corporate social responsibility with consumers is in the basement.
I don’t mean to pick on Walmart all the time it’s just that they’re such a juicy target. And they embody all the unintended consequences of shortsighted, self-interested capitalism. They have played a key role in the dismantling of America’s small business manufacturing capability, which has lowered the average wage for high school educated workers. These of course are Walmart’s key customers who are now spending so little money at Walmart stores the company simply cannot grow and it’s stock has been stagnant for years. It’s been observed that capitalists are so shortsighted that they would sell their hangman the rope used to hang them with. The fact that today that rope might be made with recycled help is of small comfort.
So here’s another way to look at corporate social responsibility. Economists talk about “switching costs” as a key factor in making financial decisions. When switching costs are low consumers are not very loyal. For instance, it’s easy to drive across the street to save two cents on a gallon of gas. Gas seems to be all the same and gas stations are all over the place, so getting the best deal seems to always make sense. On the other hand switching costs to change the source of your electricity from your local utility to putting solar panels on your house is quite high.
Switching costs are also a factor in social relationships. Dating websites are popular because switching costs are so low. You can suddenly quit talking to one dude or dudette as soon as a more attractive one shows up. But the switching costs of a 20-year marriage are much greater.
When switching costs are high, we have a high “stake” in the value of the relationship. Whether it’s with the company, our doctor or a spouse, we really want the relationship to work. When switching costs are low, you don’t care so much because there is no big price to pay by choosing something different.
So what do switching costs have to do with corporate social responsibility? It’s simply this: corporate responsibility is fundamentally connected to creating benefit for all your stakeholders. The moral question is,”Do corporate leaders have a greater responsibility to shareholders, consumers or their employees?” The prevailing idea promoted in business school is leaders have a primary responsibility to shareholders because they have invested money. Because of this view we created a hyper self-interested, short term ethic that dominates the decisions going on in most corporate offices. Not all, but most. But when you consider the switching costs the moral answers change. Today, with high-speed computer trading, mutual funds hold company shares for an average of seven minutes. Now that’s speed dating! Even conservative mutual funds readjust their portfolios every 90 days. That’s why in many circles shareholders are not considered investors but simply gamblers. And their switching costs are tiny. There are thousands of stocks all over the world to choose from which you can readily buy and sell on a seconds notice. So it seems that investors have the smallest stake of all stakeholders.
Now consider consumers. We live in an age of tens of thousands of virtually interchangeable products. Companies are crazy about branding because their brand name is the only difference between a Dell or an HP computer. The switching costs for consumers is very low so they don’t have a very high stake in your company’s success.
But there is one group whose lives depend on a company’s fortunes. That group, of course, is the employees. Their switching costs are enormous. Losing a job is extremely brutal for older employees. Research reveals that out of the ocean of workers over the age of 50 who lost their jobs in this last recession, over half will never earn as much as their previous job. We also know that job loss has a stressful, health affect that actually lasts longer than divorce. So the stakeholders with the greatest stake in their employer’s success are the employees.
The biggest challenge that employers and employees face together is to keep the skills of employees up-t0-date and relevant. Employers need employees that add value. And the value they need to add is constantly changing because of the nature of our competitive economy. Yet the investment is improving employee’s capability, knowledge and skills, and health and well-being is infinitesimal. This is not true in Germany, the world’s largest exporter of advanced technology goods. There, employee development, health and well-being are welded into the armor of the employer-employee relationship. They have a system of mentoring and apprenticeship that is the backbone of their value-added manufacturing base.
And here, a crazy company called Zappos takes employee development to the extreme. Every entry-level employee gets four weeks of training and is then put on a development track consisting of constant classes over three years. Employees are constantly taught both hard and soft skills to help them excel in their job, and their lives. Zappos employees are expected to advance into management within 5 to 7 years. No one gets to stay at a minimum pay job unless they choose to. This process of on-the-job training formal classes and mentoring is how you professionalize a workforce. And when people who have the greatest stake in the company’s success are nurtured and developed, a game-changing culture emerges. That’s not hard to understand. It’s simply rare.
So what about you? If you’re a leader perhaps it’s time to put some concentrated effort into how you could create a more remarkable workplace by over-investing in your people’s success. If you are an employee your focus needs to be on your own development. The question to ask yourself is “What do I need to know and what experiences do I need in order to be in complete control of my own career?” The best way to insulate yourself from the short-term thinking of Neanderthal leadership is to make the switching cost away from you too high.
Invest in your own future. Become extraordinary at something you value that brings value to others. It is time to become a warrior in the pursuit of your best future.